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Nonlinear approaches in testing PPP: Evidence from Southern African development community

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  • Zerihun, Mulatu F.
  • Breitenbach, Marthinus C.

Abstract

In this paper two nonlinearity tests are employed: the nonparametric test developed by Brock, Dechert and Scheinkman — known as the BDS test and the Fourier stationarity test. The BDS non-linearity test detects whether the independent and identically distribute (iid) assumption of the time series used in the analysis holds true or not while the Fourier approximation mimics a wide variety of breaks and other types of nonlinearities. Both tests confirm the non-linear nature of real exchange series in the Southern African Development Community (SADC). The result from the Fourier stationary test further provides strong evidence of an optimal currency area (OCA) among the 11 SADC countries included in this study.

Suggested Citation

  • Zerihun, Mulatu F. & Breitenbach, Marthinus C., 2016. "Nonlinear approaches in testing PPP: Evidence from Southern African development community," Economic Modelling, Elsevier, vol. 56(C), pages 162-167.
  • Handle: RePEc:eee:ecmode:v:56:y:2016:i:c:p:162-167
    DOI: 10.1016/j.econmod.2016.04.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal currency area; Purchasing power parity; Real exchange rate; Fourier; Stationary test;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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